China Pledges Support for Euro Zone’s Bailout Funds

China has pledged to invest in Europe’s bailout funds while sustaining its holdings of euro assets, a move that will no doubt assuage fears over the region’s seeming inability to effectively combat the debt crisis.

The world’s second-largest economy is nothing if not generous, throwing European finance ministers a bone as they increase pressure on Greece to deliver budget cuts in exchange for a second, 130 billion-euro bailout. Of course, Europe happens to be China’s largest export market, and a global slowdown has curtailed growth in Chinese shipments abroad. Euro-area imports shrank 0.9 percent in December.

“China is ready to get more deeply involved in participating in solving the European debt issue,” Chinese Premier Wen Jiabao said in a joint press conference yesterday with European Union President Herman Van Rompuy in Beijing. The extent to which China will involve itself in resolving Europe’s debt crisis is as yet unclear, but Wen assured reporters “China’s willingness to support Europe to cope with sovereign debt problems is sincere and firm.”

Van Rompuy, playing his part as the gracious recipient of China’s beneficence, welcomed the country’s interest in investing in European sovereign bonds and the region’s rescue fund, even though it did come a little later than hoped.

In fact, China’s support may be too little too late, as its central bank today warned that the debt crisis will not be solved in the short term, and is spreading throughout the euro area, threatening to trigger systemic risks to the global economy.

Major developed economies lack credible fiscal plans, the People’s Bank of China warned. As the euro’s new sugar daddy, China expects “those highly indebted countries to strengthen fiscal consolidation, cut deficits and reduce debt risks,” said Wen. “We hope the EU will soon reach internal consensus, make the political decision, and send to the international community a clearer and a stronger message of policy responses.”

Speaking to China’s motivations for investing in Europe, People’s Bank of China Governor Zhou Xiaochuan said China hopes for more “innovation” from Europe to provide more lucrative products that are “truly appealing” to Chinese investors.

According to Zhou, China’s investments can be channeled through three possible avenues: the central bank can participate through foreign-exchange reserves it manages; China Investment Corp., the country’s sovereign-wealth fund could also invest; and the third source of help could come from financial institutions, including China Development Bank and Export-Import Bank of China, and other institutional investors.

China holds the world’s largest foreign-exchange reserves, with $3.18 trillion, and has previously signaled it wants to diversify holdings away from U.S. dollar-denominated assets. How convenient, then, that the opportunity should arise for China to diversify its multi-trillion-dollar foreign-exchange portfolio and at the same time play the part of Superman to Europe’s Lois Lane.

Apparently the PBOC has “always had confidence in the euro’s outlook,” according to Zhou, and has already “adjusted and increase the proportion of investment in the euro.” Meanwhile, government leaders have “expressed clearly” through the Group of 20 nations that China will not reduce the proportion of its investment in euro assets.